- Says Careful Management of the Transition is Imperative to Avoid Short-term Risks to External Reserves
- Analysts express divergent views
The Central Bank of Nigeria (CBN) has cautioned that the removal of fuel subsidies, rising import costs, and increased external debt servicing may adversely affect the country’s external reserves in 2024 and 2025.
This warning was included in the CBN’s Monetary, Credit, Foreign Trade, and Exchange Policy Guidelines for the upcoming fiscal years. Despite these concerns, the CBN projects economic growth for Nigeria during this period, fueled by ongoing support for the agriculture and oil sectors, reforms in the foreign exchange market, and the implementation of the Finance Act 2023 alongside the 2022-2025 Medium-Term National Development Plan (MTNDP).
“The outlook for Nigeria’s external sector in 2024/2025 is optimistic,” the CBN stated, citing expectations of favorable trade terms due to higher crude oil prices and improved domestic oil production. The bank also expects gains from capital inflows and remittances.
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Meanwhile, the challenges remain. “Lower crude oil earnings, the removal of fuel subsidies, increasing import bills, and growing external debt servicing obligations pose downside risks to external reserves,” the CBN added.Additionally, the tightening of monetary policy by advanced economies could heighten the risk of capital outflows from Nigeria.Regarding Nigeria’s overall economic output, the CBN anticipates a positive growth trajectory, bolstered by continued support for key sectors and effective implementation of reforms.However, risks such as rising energy costs, driven by the ongoing Russia-Ukraine conflict, as well as Nigeria’s persistent security and infrastructure challenges, could undermine this outlook in the near term.
CBN said, “The outlook for Nigeria’s external sector in 2024/2025 is optimistic, on the expectation of favorable terms of trade, occasioned by sustained rally in crude oil prices and an improvement in domestic crude oil production.“The positive outlook is supported by the sustenance of crude oil price, propelled by the decision to cut production, and gains from capital flows and remittances.
“However, lower crude oil earnings, fuel subsidy removal, rising import bills, and increased external debt servicing obligations could pose downside risks for the accretion to external reserves.“In addition, the sustained monetary policy tightening by central banks across advanced economies increases the risk of capital outflow.”On Nigeria’s output growth, CBN said: “Nigeria’s output growth is expected to maintain a positive trajectory in 2024/2025.
“The growth prospects are dependent on continued policy support in the agriculture and oil sectors, reforms in the foreign exchange market, and the effective implementation of the Finance Act 2023 and the 2022-2025 MTNDP.“The risk to the outlook is still tilted to the downside, characterized by significant headwinds such as rising energy prices emanating from lingering effects of the Russia-Ukraine war, and the persisting security and infrastructural challenges, which could undermine the growth outlook in the short to medium term.“Domestic prices are expected to remain elevated through 2024/2025,on the back of spillovers from global supply constraints, and exchange rate pass-through.
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“More so, the persisting security and infrastructural challenges could exacerbate inflationary pressures.“The performance of the fiscal sector is expected to remain on a positive recovery trajectory in 2024/2025.“This outlook is contingent on the effective implementation of the Finance Act 2023 and restructuring of key revenue-generating MDAs to boost non-oil revenue.
“However, low domestic crude oil production, growing public debt, lingering insecurity, global economic slowdown, and the Russia-Ukraine war, could pose significant downside risks to fiscal operations in the short-to-medium-term.“The financial sector is expected to remain resilient in 2024/2025.“The outlook mirrors the efforts of the CBN in continuously monitoring emerging vulnerabilities and risks in the system, including periodic stress tests, examination exercises, and the provision of risk mitigants.
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Analysts hold divergent views on the impact of fuel subsidy removal. Clifford Egbomeade notes that removal may lead to higher fuel prices, increased cost of fuel imports, and pressure on external reserves
He said:“The removal of subsidies typically leads to higher fuel prices, and given Nigeria’s heavy reliance on refined petroleum products, this can significantly increase the cost of fuel imports, thereby raising the demand for foreign exchange. As a result, external reserves may come under pressure due to the increased use of foreign currency to cover these higher import bills.
However, Ayodeji Ebo argues that removal will increase accretion to external reserves as NNPC deductions cease, leading to increased FX remittance to the CBN
